Investing 101: Understanding Market Volatility

Handling volatility in your portfolio: 4 tips for success

There are many strategies you can use to help ensure your portfolio can handle market volatility when things swing up or down — or back and forth! Here are just a few:

1. Diversify your portfolio

In simple terms, diversification is a strategy that reduces risk by spreading your financial assets across a wide swath of the financial market. This means investing in different types of assets (stocks, bonds, commodities, real estate), investing in different subclasses within a given asset (e.g., national and international, large cap and small cap, value and growth), and investing in different market segments (e.g, healthcare, energy, and technology stocks); corporate and government bonds; residential and commercial real estate). Keeping a mix of assets means that your wealth isn't tied to the performance of any one thing. When volatility happens, you may see part of your portfolio decline in value, but you don't risk losing it all.

2. Think of volatility as an opportunity

As Jonathan Clements explained to Marketwatch, "Seasoned investors don't get nervous when the market declines. Rather, they get excited by the prospect of buying shares at much cheaper prices."3

Remember that buying into the market when prices are low is exactly what you want to do as a successful investor (as you want to minimize buying when prices are at their highest, or most expensive). Dollar cost averaging allows you to buy more when the market is low and less when the market is high, because you make the same contribution to the same set of investments at the same time every month.4

This strategy prevents you from having a knee-jerk reaction to financial reporting, which could leave you buying high or selling low if markets get volatile and change unexpectedly. By creating a smart investment strategy before you begin — and having a plan that accounts for volatility — you won't be tempted to react emotionally.

3. Rebalance your portfolio

Market volatility can ultimately lead to some assets going up in value relative to others in your portfolio. Rebalancing your portfolio is way to bring your portfolio back to the diversity and risk tolerance goals you originally had, while allowing you to buy more of an asset when its price is lower and more when it is higher. Here's how it works:

Let's say you wanted to be invested 60% in stocks and 40% in bonds. But then the stock falls and the bond market rises. You might now be invested 40% in stocks and 60% in bonds. This no longer aligns with your original investment plan and risk tolerance. So, you sell off enough of your bonds (which have risen in value) to only have 40% in bonds, and you use that money to buy more stock at a time when the prices are down.

This same logic can be applied to subclasses within an asset class, or to a particular market segment. For example, if a large percent of your assets got concentrated in technology during a tech boom, you'd sell some of those tech stocks and invest them in a different market segment.

4. Create a long-term plan

Market volatility could be more of an issue if you needed to get cash from your investments tomorrow. But as a general rule, you should only invest the money you know you won't need for at least five years — which is typically long enough to ride out any short-term volatility.

This means there's no reason to keep an eye on the daily movements of the market. We know the market will fluctuate up and down. And, those fluctuations might look like big fluctuations if you only look at day-to-day activity.

Take a step back and consider the stock market from the bigger perspective. If you plan to stay invested for the long term to reach your goals, whatever happens today will most likely be a blip on the radar five to 10 years from now. So when you hear the news about volatility, don't worry. Take the long view and don't get caught up in the daily hype.

5. Know your own risk tolerance

If you know you can't stand to see dramatic market volatility — even after creating a long-term investment plan — then you may need to take less risks with your investments. The tradeoff is a smaller return, but that might be worth it if you have little appetite for risk and thinking about potential losses keeps you up at night.

Just be careful you don't prioritize avoiding risk over taking the appropriate risks. Risk and return are related.

Volatility is a normal part of the financial markets you'll likely invest in as you work toward your retirement savings goal. While failing to manage that volatility in your portfolio could leave you exposed to unnecessary risk, it's nothing to fear as long as you put the right strategies in place and expect it, so you don't panic when it happens.

If you have questions, a financial advisor can provide additional guidance. Please give us a call at 1-888-SYNOVUS (1-888-796-6887).